Ramsey Company issued $300,000 face value of bonds on January 1, 2016. The bonds had a 6 percent stated rate of interest and a 10-year term. Interest is paid in cash annually, beginning December 31, 2016. The bonds were issued at 101 ½. The straight-line method is used for amortization.
a. Use a financial statements model like the one shown below to demonstrate how (1) the January 1, 2016 bond issue and (2) the December 31, 2016 recognition of interest expense, including the amortization of the premium and the cash payment, affect the company’s financial statements. Use + for increase, – for decrease, and NA for not affected.
b. Determine the carrying value (face value plus premium) of the bond liability as of December 31, 2016.
c. Determine the amount of interest expense reported on the 2016 income statement.
d. Determine the carrying value of the bond liability as of December 31, 2017.
e. Determine the amount of interest expense reported on the 2017 income statement.